Table of Contents
Margin is a form of leverage, and initial margin is the amount of cash and/or collateral a qualified investor must deposit in a margin account in order to open a leveraged trade. Initial margin is generally expressed as a percentage.
For example, the Federal Reserve’s Regulation T requires a minimum 50% initial margin deposit for trading stocks on margin. Thus a $7,500 initial margin would be required to open a $15,000 position.
Different securities, such as futures contracts and forex (foreign currency) trades, may have different initial margin requirements. Trading on margin isn’t possible for most retail investors with cash accounts; only qualified investors may open a margin account.
Key Points
• Initial margin is the amount of cash or collateral an investor must deposit in a margin account to open a leveraged trade, typically expressed as a percentage.
• Initial margin is calculated by multiplying the investment amount by the initial margin requirement percentage.
• Regulation T requires a minimum 50% initial margin for trading stocks, though all margin rules can vary depending on the security and the brokerage.
• Trading on margin carries risks, as borrowed funds must be repaid with interest regardless of trade outcomes, potentially leading to greater losses.
• Maintenance margin is the minimum amount an investor must keep in their margin account after purchasing securities on margin, with a FINRA-set minimum of 25%.
Using Initial Margin
Qualified investors who want to open a margin account at a brokerage must first deposit the required minimum initial margin amount. They can make that deposit in the form of cash, securities, or other collateral, and the initial margin amount will depend on the securities they’re trading, and whether the brokerage firm has any specific requirements of its own. Note that standard cash trading accounts are not available for margin trading.
Once the investor makes that initial margin deposit as collateral, they can begin margin trading. Margin allows the investor to buy securities with money borrowed from the brokerage, i.e., leverage.
As noted, Regulation T has a 50% minimum initial margin requirement. However, brokerage firms offering margin accounts can set their initial margin requirement higher than 50% based on the markets, their clients, and their own business considerations. But brokerages cannot set the initial margin for their clients any lower than 50%. The level that a brokerage sets for margin is known as the “house requirement.”
Risks of Margin Trading
Trading on margin brings its own unique set of opportunities and risks because margin debt must be repaid, with interest, regardless of the outcome of the trade. Trading on margin can lead to outsized profits if investors buy appreciating stocks. But if an investor’s trade moves in the wrong direction, they can lose even more than if they’d purchased the securities outright because the borrowed funds must be repaid, with interest.
In the unfortunate situation where the securities purchased on margin lose all value, the investor must deposit the full purchase price of the securities to cover the loss. Given these risks, you’re typically not able to trade on margin when investing online in a cash account or in retirement accounts such as an IRA or a 401(k).
Sometimes investors use margin to short a stock, or bet that it will lose value. In that instance, they’d borrow shares from the brokerage firm that holds a position in the stock and sell them to another investor. If the share price goes down, the investor can purchase them back at a lower price.
In general, investors looking for safer investments might want to avoid margin trading, due to their inherent risk. Investors with a higher tolerance for risk, however, might appreciate the ability to generate outsize returns.
How Do You Calculate Initial Margin?
An investor who wants to trade in a margin account, must first determine how much to deposit as an initial margin. While that will depend on how much the investor wants to trade, and how big a role margin will play in their strategy, there are some guidelines.
The New York Stock Exchange and some of the other securities exchanges require that investors have at least $2,000 in their accounts. For day traders, the minimum initial margin is $25,000 (although a proposed FINRA rule change in 2025 may eliminate that requirement, pending SEC approval).
Each brokerage has its own set of requirements for trading stocks on margin in terms of the amount clients need to keep as collateral, and the minimum size of the account necessary to trade on margin.
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Initial Margin Requirement Examples
It’s possible, for example, that a brokerage firm might require 65% initial margin. The initial margin calculation simply requires the investor to multiply the investment amount by the initial margin requirement percentage. For an investor who wants to buy $20,000 of a given security, they will take that purchase price, multiply it by the margin requirement is 65% or 0.65 – to arrive at an initial margin requirement of $13,000.
The advantage for the investor is that they get $20,000 of exposure to that stock for only $13,000. In a scenario where the investor is buying a stock at a 50% margin, that investor can buy twice as many shares as they could if they bought them outright. That can double their return if the stock goes up. But if the stock drops, that investor could lose twice as much money.
If the price falls far enough, the investor could get a margin call from their broker. That means that they must deposit additional funds. Otherwise, the broker will sell the stock in their account to cover the borrowed money.
Initial Margin vs Maintenance Margin
For investors who buy securities on margin, the initial margin is an important number to know when starting out. But once the investor has opened a margin account at their brokerage, it’s important to know the maintenance margin as well.
The maintenance margin is the minimum amount of money that an investor has to keep in their margin account after they’ve purchased securities on margin.
Currently, the minimum maintenance margin, as set by the Financial Industry Regulatory Authority (FINRA,) is 25% of the total value of the margin account. As with the initial margin requirements, however, 25% is only the minimum that the investor must have deposited in a margin account. The reality is that brokerage firms can – and often do – require that investors in margin accounts maintain a margin of between 30% to 40% of the total value of the account.
Some brokerage firms refer to the maintenance margin by other terms, including a minimum maintenance or a maintenance requirement. The initial margin on futures contracts may be significantly lower.
Maintenance Margin Example
As an example of a maintenance margin, an investor with $10,000 of securities in a margin account with a 25% maintenance margin must maintain at least $2,500 in the account. But if the value of their investment goes up to $15,000, the investor has to keep pace by raising the amount of money in their margin account to reach the maintenance margin, which rises to $3,750.
Maintenance Margin Calls
If the value of the investor’s margin account falls below the maintenance margin, then they can face a margin call, or else the brokerage will sell the securities in the account to cover the difference between what’s in their account and the maintenance margin.
With a maintenance margin, the investor could also face a margin call if the investment goes up in value. That’s because as the investment goes up, the percentage of margin in relation by comparison goes down.
The Takeaway
Initial margin requirements and maintenance margins are just two considerations for investors who are looking to trade on margin. They allow investors to understand how much cash they need to hand on hand in order to trade on margin — and when they might be susceptible to a margin call.
If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.
FAQ
What is an example of initial margin?
If the initial margin in an account is 50%, and an investor wants to purchase $20,000 of a given security, they will need to deposit $10,000 of initial margin.
Is initial margin refundable?
Not exactly. Margin acts as a deposit on a leveraged position. Once the trade is complete, barring any losses, the investor may recoup their initial margin deposit.
Why is initial margin important?
Initial margin is important because it acts as collateral to cover a loss in the event that the investor loses money while trading on margin. The initial margin can help the lender – or brokerage – recoup some of those losses.
Why is initial margin paid?
Initial margin acts as a deposit or a form of collateral to establish good faith between a an investor and their brokerage.
Who sets the initial margin requirement?
Initial margin requirements are established by the Federal Reserve’s Regulation T. But there can also be other requirements put in place by an individual brokerage, and FINRA’s additional margin rules can also influence the amount.
Does initial margin have to be cash?
Generally, initial margin needs to be in the form of cash deposits, but it’s possible that some brokerages will allow it to take the form of other securities, or cash plus securities.
Is initial margin a cost?
Initial margin is not a cost per se, but a form of collateral. As such, it’s not a typical “cost,” though if a trade goes south the initial margin may be used to cover any losses.
Photo credit: iStock/FG Trade
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